Pantech: Still in the early phases of growth

Pantech: Still in the early phases of growth

Tags: InsiderAsia Pantech Group

Written by InsiderAsia
Tuesday, 04 August 2009 18:10



THE latest earnings results for Pantech Group (90.5 sen) for the first quarter (1Q) of its financial year (FY) ending February 2010 underlined the relative resilience in the company's business operations. Sales totalled RM123.9 million, down 11% quarter-on-quarter (q-o-q) but were up 9.3% year-on-year (y-o-y).

We expect sales and earnings to contract slightly for the full year, after adjusting for "abnormally high" steel prices, demand and margins in 2008. Sales and net profit are estimated to decline 4% and 10% to roughly RM490.3 million and RM53.8 million, respectively in FY10.

However, we are sanguine on Pantech's growth prospects beyond the current adjustment period. The company is enjoying continued stream of orders from customers and demand should gradually strengthen over the coming months. Sales are forecast to resume growth, by about 15%-17%, in FY11-FY12.

Potentially handsome capital gains
Based on its growth prospects, the stock appears to be trading on very attractive valuations. Pantech's shares are priced at only 5.9 and 5.0 times our estimated earnings for FY10-FY11, respectively.

Besides compelling valuations relative to its prospective growth rates, its shares are also trading well below the average price-to-earnings (P/E) for the oil & gas industry — estimated at about 10 times — as well as the broader market, which is currently priced above 15 times forward earnings.

In addition to potentially handsome capital gains, Pantech also rewards shareholders with fairly decent yields. Dividends are estimated to total 2.5 sen per share for the current financial year, which translate into a net yield of 2.9%.

Resilient local demand from oil & gas

As mentioned above, the company's sales held up fairly well in 1QFY10 despite the global downturn.

Sales under the trading arm, which caters primarily to the domestic oil & gas market, remain robust. The manufacturing arm, mainly for exports, did register some slowdown. We believe this was due, primarily, to customers drawing down on stocks. Demand should start to recover over the course of the next few months.

In fact, Pantech has also been unwinding some of its own inventory. Stocks were lower at RM174.9 million at end-May 2009, down from RM202.7 million at end-February. As a result, the company's gearing improved to 55% compared to 64% over the same period.

Oil prices unlikely to revisit lows

Crude oil prices have rebounded from the December 2008 lows of around US$35 (RM122.85) per barrel — rallying as high as US$73 per barrel in June. Although oil has since given back some of its recent gains on the back of growing concerns over the pace of the global economic recovery, we doubt prices will fall back to previous lows.

Market consensus suggests crude oil will trade between US$50 and US$70 per barrel in the near to medium term — and likely to head higher going forward as the global economic recovery gains traction. The long-term outlook for oil remains unequivocally bullish.

Currently, crude oil is hovering around US$70 per barrel — above the breakeven levels for most projects, including deepwater projects. Hence, we should see strong support for continued exploration and production activities in the sector.

Solid order book of around RM150 million

Indeed, Pantech continues to receive good flow of orders. The company typically maintains a running order book of around RM150 million, which will keep it busy for at least the next three months.

Pantech to pursue growth

Pantech's sales grew at an average compounded rate of 57% per annum over the past five year. We are confident that it will continue to grow at a double-digit pace in the foreseeable future.

The company has a wide clientele base as the largest one-stop centre for PFF (pipes, fittings and flow control products) solutions in the country. It carries in excess of 20,000 inventory items, thus providing customers timely and comprehensive solution for the transmission of all fluids and gases. Each and every one of the company's products carries proper certification, to meet the high benchmark standards for safety and quality required of the oil & gas industry.

Repeat orders for regular maintenance undertaken by its existing customers provide a steady stream of business and account for up to 40% of Pantech's annual sales.

Expanding product range and customer base

To further boost growth, the company is pursuing new markets and expanding its product range. It is an active participant in oil & gas exhibitions — local and overseas — to raise the company's profile and tap new markets.

It recently acquired two pieces of land — adjacent to its current manufacturing facility in Selangor and office in Johor — for future expansion purposes. In particular, Pantech intends to focus on niche market segments for customised products that carry higher profit margins.

In a positive development, Pantech has just won approval from the European Union (EU) commission to sell its products in the eurozone without attracting the hefty anti-dumping duties currently levied on many countries, including Malaysia. This exemption will give the company an upper hand in further widening its export markets and customer base.

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.

F&N earnings up 49% to RM59m

F&N earnings up 49% to RM59m

Tags: 100PLUS Fraser & Neave soft drinks

Written by The Edge Financial Daily
Thursday, 06 August 2009 20:22

KUALA LUMPUR: FRASER & NEAVE HOLDINGS BHD [] posted net profit of RM59.12 million in the third quarter ended June 30, 2009, up 49% from RM39.65 million a year ago as it benefitted from higher soft drinks sales volume, improved sales mix and increased productivity.

It said on Aug 6 that revenue was higher at RM921.11 million compared with RM884.58 million while earnings per share were 16.6 sen versus 11.1 sen.

"Group operating profit increased 43% over the previous year as the group benefitted from higher soft drinks sales volume, improved sales mix and increased productivity," it said.

Group revenue registered a modest growth of 4.1% over the corresponding quarter last year in spite of negative GDP growt h in the core markets of Malaysia and Thailand.

Soft drinks sales benefitted from the unusually hot weather and successful marketing and promotional activities. Sales volume and revenue grew an encouraging 14% and 18% respectively. 100PLUS sales volume was up 36% against the same period last year.

The dairies division revenue declined 4%, due to lower export sales and higher trade discounting in the domestic markets. However, domestic sales volume was stable.

However, the glass division volume was affected by lower sales of the Thai plant and the reduction of capacity in Malaysia following the closure of the Petaling Jaya furnace. Revenue was however maintained due to overall higher selling prices.

For the nine months to June 30, 2009, group revenue grew 2% to RM2.75 billion against a backdrop of a regional economic recession. Soft drinks division registered a high single digit revenue growth but lower exports affected overall sales of the dairies division.

Group operating profit before unusual items, improved by 30.5% to RM262.6 million as all core business divisions registered double digit improvements. After accounting for unusual items, group operating profit grew by 21.7% to RM244.9 million.

In the first nine months of FY08/09, the Group has already matched the attributable profit for the full FY07/08 year.

"The group is confident, barring unforeseen circumstances, to perform better than last year," it said.

Stocks to watch: Glove makers

Stocks to watch: Glove makers

Written by The Edge Financial Daily
Monday, 10 August 2009 23:20

KUALA LUMPUR: Glove manufacturers are likely to continue to be in focus on Tuesday, Aug 11 as governments, including Malaysia, step up measures to stem the spread of the A H1N1 flu virus, which has seen a marked increase in cases and fatalities.

The smaller capitalised glove manufacturers including ADVENTA BHD [ ADVENTA 2.090 -0.020 (-0.948%)], RUBBEREX CORPORATION (M) BHD [ RUBEREX 1.930 -0.070 (-3.500%) ], SUPERMAX CORPORATION BHD [ SUPERMX 2.980 -0.050 (-1.650%) ], KOSSAN RUBBER INDUSTRIES BHD [ KOSSAN 4.110 -0.040 (-0.964%) ], LATEXX PARTNERS BHD [ LATEXX 2.230 0.060 (2.765%) ] rose in active trade on Aug 10 and could continue to generate trading interest.

Larger capitalized manufacturers like TOP GLOVE CORPORATION BHD [ TOPGLOV 7.300 0.020 (0.275%) ] and Hartalega Bhd would also see trading interest.

However, after the hefty price gains in recent weeks, investors should also expect intermittent profit taking.

Maybank IB upgrades F&N to buy

Maybank IB upgrades F&N to buy

Tags: Brokers Call F&N Maybank IB

Written by Financial Daily
Monday, 10 August 2009 11:37

MAYBANK Investment Bank (Maybank IB) has upgraded FRASER & NEAVE HOLDINGS BHD [] (F&N) to a buy at RM9.80, from hold previously, with a higher target price of RM11.16 (from RM9.20).

The research house said margins at the company’s dairies division had expanded back to FY03-FY06 levels while F&N’s Thailand dairy assets were set to propel the division to become F&N’s largest based on operating profit, surpassing the soft drinks division.

“We are raising our earnings forecasts by 10%-25% as skimmed milk powder prices appear set to return to long-term equilibrium levels,” it said in a report last Friday.

The research house said F&N’s third-quarter (3QFY09) results were above expectations, and net profit soared 49% year-on-year (y-o-y) to RM59 million as the two largest divisions, soft drinks and dairies, both outperformed.

“Soft drink revenues rose 18% y-o-y in spite of the absence of major festivities during the quarter. This helped the operating profit margin expand by 1.2 percentage points y-o-y to 10.2%,” it said.

Maybank IB said skimmed milk powder costs fell 44% y-o-y and dairies division operating profit rose 35% y-o-y in spite of marginally lower revenues.

“This appears to be the historical equilibrium range at which F&N was able to record operating profit margins of about 7% in four of the five years before it acquired the Thailand assets,” it said.

The research house noted that the dairies division margins appeared sustainable, and looked ready to surpass the soft drinks division as F&N’s main operating profit contributor.

“We raise our FY09-11 forecasts for this division by 42%-63% on the expectation that operating margins can be sustained at a minimum of 7% (versus 4.5% in FY08),” it said.

Maybank IB said while it awaited clearer management guidance on developments at its two smaller divisions, it acknowledged the brighter prospects for the group’s two key divisions in the forecast period.

“F&N’s stronger earnings potential and stronger cash flow generation justify a raising of our target price-earnings ratio (PER) multiple to 17 times CY10 PER, (from 16 times PER) which is at the top end of historical valuations,” it said.

F&N notched up 10 sen to close at RM9.90 last Friday.


This article appeared in The Edge Financial Daily, August 10, 2009.

Glovemakers soar on H1N1 threat

Glovemakers soar on H1N1 threat

Tags: Kossan Supermax Top Glove

Written by Surin Murugiah
Tuesday, 11 August 2009 01:05

KUALA LUMPUR: The increasingly deadly outbreak of the influenza A (H1N1) virus threat sent the stocks of rubber glove manufacturers soaring on Aug 10, with some hitting their 52-week high.

With the death toll from the H1N1-related disease in Malaysia having reached 32 yesterday, demand for rubber gloves and masks have been increasing.

Inter-Pacific Research Sdn Bhd head of research Anthony Dass said he did not see any softening in the demand for rubber gloves and surgical masks at the moment.

“The strong demand due to the virus outbreak will continue to push the stock prices. This would translate into potentially good earnings for the companies,” he said.

Last week, OSK Equity Research in a report had said it remained overweight on the rubber gloves sector, and that the demand for gloves from the medical industry was strong, especially from developing countries.

It said that since the H1N1 outbreak has been raised to pandemic level, the governments of developed countries like US and Europe have urged all healthcare MNCs to stock up on rubber gloves, which has created short-term demand.

“Over the longer term, demand is expected to come from developing countries like China, India and Russia, which are gradually increasing their use of gloves.”

“Also, with US tightening Food and Drug Administration (FDA) regulations effective December 2008, the number of glove defects per batch would need to be reduced to qualify for entry to the US market,” it said.

This would reduce the supply of rubber glove exports to US due to the retention of “unqualified” gloves at the ports and hence creating new sales opportunities for the established rubber glove manufacturers, said the research house.

On Aug 10, the shares of ADVENTA BHD [ ADVENTA 2.090 -0.020 (-0.948%) ] rose almost 22% or 38 sen to close at its 52-week high of RM2.11, while RUBBEREX CORPORATION (M) BHD [ RUBEREX 1.930 -0.070 (-3.500%) ] added 15.6% or 27 sen to RM2.

SUPERMAX CORPORATION BHD [ SUPERMX 2.980 -0.050 (-1.650%) ] gained 10.99% or 30 sen to RM3.03, KOSSAN RUBBER INDUSTRIES BHD [ KOSSAN 4.110 -0.040 (-0.964%) ] up 4.3% or 17 sen to RM4.51 while LATEXX PARTNERS BHD [ LATEXX 2.230 0.060 (2.765%)
] rose 10.1% or 20 sen to RM2.17.

Supermax was among the most actively traded stocks yesterday with 11.6 million shares done, while Latexx saw some 10.4 million of its shares traded.

Meanwhile, TOP GLOVE CORPORATION BHD [ TOPGLOV 7.300 0.020 (0.275%)] gained seven sen to RM7.28.

HARTALEGA HOLDINGS BHD [ HARTA 5.260 -0.030 (-0.567%)], however, fell six sen to RM5.29.

From The Edge

Which one stock excites you in the glove sector?

Glove sector

No. Name Last Open High Low Chg Chg(%) BuyQ Buy SellQ Sell Volume
1. ADVENTA 2.14 2.15 2.02 2.05 -0.06 -2.84 43.0 2.05 13.6 2.06 3,776.9
2. HARTA 5.29 5.29 5.25 5.26 -0.03 -0.57 14.0 5.25 11.9 5.26 137.0
3. KOSSAN 4.15 4.19 4.10 4.12 -0.03 -0.72 1.0 4.12 15.0 4.13 605.8
4. LATEXX 2.20 2.24 2.13 2.23 0.06 2.76 42.0 2.22 86.0 2.23 8,078.0
5. SUPERMX 3.04 3.06 2.97 2.97 -0.06 -1.98 96.0 2.96 105.6 2.97 3,619.6
6. TOPGLOV 7.30 7.30 7.29 7.29 0.01 0.14 42.5 7.29 200.7 7.30 480.6


Which is the "best" company to choose in this sector?

Assess each of the above based on the following criterias:

• Sustainable future earnings and future earnings growth
• Profit Margin, ROE
• Market capitalization (small cap company can grow at faster rate)
• Debt/Equity Ratio
• Market valuation: P/E, P/B, P/S

A recent article in the Star newspaper mentioned that Adventa was the glove company with the lowest valuation. The company's price has since shot upwards by a huge percentage. From my analysis, another stock is perhaps more attractive.

Be very shrewd

The investor has two powerful enemies:

• market psychology and
• the uncertainties of the future.

His essential ally is:

• a low price.

General rules to follow:

Avoid secondary stock for investment if it sells at a full price. (That is, unless it is selling at a substantially less than indicated by his calculation of the value of the enterprise.)

• When a secondary stock is popular - because of some substantial improvement in its position and prospects - it is practically never a sound purchase for investment.
• On the contrary, the investor who bought it when it was unpopular and the price was low should now be strongly moved to sell it despite the promising development.
• This is his chance to cash in on his earlier shrewdness. It should not be missed.

There will be a number of individual instances in which this important principle will seem to work out poorly, because the company will continue to forge ahead and the average price of the future will be much higher than the level at which the investor sold.

• Such occurrences, while very possible, are exceptional and delusive.
• If they did not happen the market would never go to its extemes. They resemble the cases of large winnings at roulette, without which encouragement there would be no customers for the wheel.
• It would be too easy to supply examples from the past of secondary stocks that rose too far on favourable developments and then cound a much lower average level.

When a security is popular the relationship of its price to indicated value is an entirely different matter than when the same or a similar security is unpopular.

• The stock market often departs from a rational valuation of the securities it deals in, and is often prone to go to extremes in the direction of optimism and pessimism on the flimsiest of foundations.

Be shrewd

One cannot be taught how to weigh the future. No matter how rosy the prospects, the price may still be too high.

Therefore, always remember:

1. keep away from buying inferior stocks during periods of enthusiasm and high prices.
   
   
2. buy your good quality companies when the market level is below, rather than above, its indicated long-term normal figure.
   
   
3. do not pay extremely high prices for good stocks.

Warren Buffett stocks up on foreign government bonds

Warren Buffett stocks up on foreign government bonds

Warren Buffett has increased his holdings of foreign government bonds as the billionaire investor's spending on equities fell to its lowest in more than five years.

Published: 8:23AM BST 10 Aug 2009


Mr Buffett's Berkshire Hathaway owned about $11.1bn in foreign government bonds in its insurance units at the end of June, up from $9.6bn three months months earlier, Berkshire said in a regulatory filing, according to a report on Bloomberg.

In the second quarter, Mr Buffett spent $2.6bn on bonds compared with $350m on shares. The billionaire investor, whose views on financial markets are closely followed around the world, has benefitted as equity markets rallied over the past three months.


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“Some of the normal places he’s gotten the cash to invest are just getting killed in the recession,” Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington, told Bloomberg News.

“So he’s locking in these guaranteed returns, moving from the volatility of stocks to a steady stream of income that, in some cases, is almost at the return you normally get from the stock market.”

Mr Buffett booked a $4.1bn (£2.5bn) paper profit on the $5bn he invested in Goldman Sachs at the height of the financial crisis.

Known as the "Sage of Omaha" for his money-making ability, has made the return in one of the bleakest periods for investing in decades, benefiting from the recent uptick in Goldman's share price.


http://www.telegraph.co.uk/finance/markets/6003042/Warren-Buffett-stocks-up-on-foreign-government-bonds.html

** Insiders Can Alter Market Value as Their Needs Dictate

The value of the stockholdings of insiders is measured by what they can do with the business if and when they want to do it.

• If they need a higher dividend to establish this value, they can raise the dividend.
• If the value is to be established by selling the business to some other company, or by recapitalizing it, or by withdrawing unneeded cash assets, or by dissolving it as a going concern, they can do any of these things at a time appropriate to themselves.
  

Rarely if ever do (controlling) insiders suffer loss from an unduly low market price which it is in their power to correct.

• If by any chance they should want to sell, they can and will correct the situation first.
• In the meantime they may benefit from the opportunity to acquire more shares at a bargain level, or to pay gift (and prospective estate) taxes on a small valuation, or to save heavy surtaxes on larger dividend payments, which for them would mean only transferring money from one place where they control it into another.
  

To the extent that operating management and inside stockholders form a cohesive group - and this is more typical than not in corporate affairs - the insiders must be considered as opposed in a practical sense to the improvement of bad management.

• They are often opposed to the payment of an adequate dividend, because they save taxes by a low dividend and they have effective control over the undistributed earnings.
• A holding-company setup may be of great strategic advantage to them, and they can terminate its disadvantages whenever they wish.
• The same is true of the retention of excessive capital in the business.
  

Thus on many counts the insiders are likely to look upon corporate policies in ways diametrically opposed to the interests and desires of the typical outside stockholder.

• We believe that the public stockholder is entitled to have his legitimate interests preferred over the special interests of the insiders.
• Once the public has been asked to invest its money in the common stock of any company, the management and the controlling stockholders should recognize a continuing obligation to conduct the business in all respects as trustees for the public stockholders and to follow such policies as are conducive to satisfactory investment results by the ordinary, outside owner of their shares.
• This principle is in accord with the spirit of our laws. It has not been applied as yet to any extent in legal cases, because, we believe, the issues are somewhat subtle and they have not been presented to the courts with sufficient clarity and vigor.
  
  

Ref: Security Analysis by Graham and Dodd

Controlling Stockholders and the Outside Stockholders

There are some important differences of status and possible conflicts of interest between the controlling stockholders and the outside stockholders.

The basic point is that controlling stockholders are not dependent on either the dividend returns or the market price of the shares as the fundamental source of the value of their investment.

The outside stockholder is dependent on one or both of these factors.

This basic difference is of the greatest practical importance in corporate affairs, but so far it seems to have escaped both public notice and judicial notice.


Ref: Security Analysis by Graham and Dodd

The general concept of corporate insiders seems to view them as people who profit from their special knowledge of what is going on, and who benefit at times by being on both sides of business deals with the company.

Whatever its earlier validity, this idea has little present relevance to corporate affairs. Strict interpretation of the laws imputing a trustee's responsibility to those in control, plus constant watchfulness by the SEC, plus a great advance in ethical standards of personal conduct, have combined to eliminate the gross abuses of the past.

Poor Management a Double Liability in Unprofitable Business

It is a true remark that the determining factor in keeping an unprofitable business running is often the natural desire of the management to hold on to their jobs.

Unfortunately, poor-caliber management is more anxious to hang on than high-caliber management, since the latter can usually find other and perhaps better employment elsewhere.

Thus, good management can make most businesses successful, and if the obstacles to success are insurmountable it will try to work the situation out in whatever way will yield the best results to the stockholder. *

Bad management often makes an intrinsically good business unsuccessful; it bitterly opposes any move that will hurt its own position, whether the move be in the direction of

• improving the management,
• selling the business at a price far above the past market value, or
• discontinuing it altogether.

Ref: Security Analysis by Graham and Dodd

* The case history of Hamilton Woolen showed how a capable and conscientious management dealt with the problem of continuing a hitherto unsuccessful business. The question was twice put to the stockholders for a vote. In 1927, they voted to continue the business, with new policies, and the results were satisfactory for a time. In 1934, following a disastrous strike, they voted to liquidate the business and realised considerably more than its previous market value as a going concern.

Ref: Security Analysis by Graham and Dodd

The Question of Continuing the Enterprise

If a publicly owned business is consistently unsuccessful, should the stockholders move to dispose of it?

Does the answer depend mainly

• on business judgement,
• on ethics or
• on custom?

We think that what usually happens in such cases is dictated mainly by custom - by the stockholders' habit of letting things drift until something happens to change the picture.

The ethical question turns on the possible obligation of the owners toward society, the employees, or the management, which may require them to continue to operate the business even though it is unprofitable. This matter has not been thought through.

Economists say that the elimination of unprofitable enterprises is an important means by which the free-enterprise system adapts its output flexibly and efficiently to the public's wants. However, while society as a whole may lose rather than gain by the continuance of unprofitable businesses, the impact of discontinuance on local communities may be disastrous and cannot be ignored.

With respect to employees, no ethical obligation seems to interfere with drastic layoffs and discharges when demand declines. Whether a concern is successful or unsuccessful, the NUMBER of employees retained on the payroll is expected to be a matter of sound business judgement, and not of ethics.

The increasing power of labour unions has tended to impose uniform wage requirements on all companies in an industry, with the result that the less favourably situated units have no flexibility of contract and therefore little chance of working out a decent return for the owners. If ethical considerations are to dictate the continuance of such enterprises, it would seem that there should be some give-and-take between stockholders and employees.

Ref: Security Analysis by Graham and Dodd

The Holding-company Device

Disadvantageous Corporate Structure: The Holding-company Device

In the 1920s, there were many holding companies. These were enterprises organized to acquire voting control of previously existing concerns.

In most cases, the holding company issued its own senior securities (bonds and preferred shares) to pay in whole or part of the common shares it acquired. The process was repeated, in many instances, by the formation of new holding companies, with new layers of senior securities, to acquire control of existing holding companies. In this way, there were rapidly created a number of heavily pyramided capital structures - nearly all in the public-utility, railroad and "investment-trust" fields.

After the crash of 1929, most of these structures collapsed, with tremendous losses to speculators and misguided investors therein.

The moving spirits behind these astonishing examples of "high finance" were actuated by the twin motives of making enormous profits out of such corporate manipulations and of wielding personal power over great financial and industrial empires. Their motives were extremely popular with the public, until the day of reckoning, because there provided continuous fuel for the speculative fires.

As might be expected, the subsequent debacle created a complete revulsion of feeling. Holding companies became, and are still, highly unpopular with both investors and speculators.

For many years past, the existence of a holding company, instead of adding to the value of the underlying assets, has constituted a definite drawback and detriment. The market has been emphatic on this point. Holding-company securities have consistently sold at substantial discounts from the concurrent market value of the securities they own.

Discounts Disappear in Dissolution

All the evidence points clearly to the conclusion that, since 1929, a holding-company setup has been disadvantageous to the outside shareholders, and that they benefit significantly from the dissolution of such companies and the consequent direct ownership of the underlying securities.

It has been the standard experience that the shares sold at substantial discounts from their true value as long as the holding company continued as such,k and that these discounts disappeared when the holding company disappeared.

The attitude of managements in this matter deserves to be recorded. In nearly all cases, they opposed the dissolution of the holding companies; in a number of instances they waged bitter and costly legal battles, with their stockholder's money, to prevent the step. In their communications to stockholders they insisted that continuance of the holding companies would be to the stockholders' advantage.

We believe that most of their arguments were disingenuous and that in this matter they were defending their own interest - in some cases unconsciously, no doubt - in preference to that of the public stockholders.

We make these statements with considerable reluctance; but we believe it essential that the fact be brought home to stockholders, as forcibly as possible, that in matters in which management's interests may be opposed to the stockholders', the latter cannot rely upon receiving fair treatment from management and must be prepared to recognize and do battle for their own advantage.

A number of holding companies still existed at the end of 1950. The market persisted in its considered judgment, voiced through year-after-year prices, that such arrangements are detrimental to the outside stockholder. The fact they are permitted to continue we consider to be a monument to the inertia and bad judgment displayed by the American investor in his capacity as continuing shareholder.

Ref: Security Analysis by Graham and Dodd

Inactivity is also an intelligent investing behaviour

Warren Buffet wrote to the shareholders of Berkshire Hathaway:

Inactivity strikes us as intelligent behaviour. Neither we nor most business managers would dream of feverishly trading highly-profitable subsidiaries because a small move in the Federal Reserve's discount rate was predicted or because some Wall Street pundit had reversed his views on the market. Why, then, should we behave differently with our minority positions in wonderful businesses? The art of investing in public companies successfully is little different from the art of successfully acquiring subsidiaries. In each case you simply want to acquire, at a sensible price, a business with excellent economics and able, honest management. Thereafter, you need only monitor whether these qualities are being preserved.

When carried out capably, an investment strategy of that type will often result in its practitioner owning a few securities that will come to represent a very large portion of his portfolio. The investor would get a similar result if he followed a policy of purchasing an interest in, say, 20% of the future earnings of a number of outstanding college basketball stars. A handful of these would go on to achieve NBA stardom, and the investor's take from them would soon dominate his royalty stream. To suggest that this investor should sell off portions of his most successful investments simply because they have come to dominate his portfolio is akin to suggesting that the Bulls trade Michael Jordan because he has become so important to the team.

In studying the investments we have made in both subsidiary companies and common stocks, you will see that we favour businesses and industries unlikely to experience major change. The reason for that is simple: Making either type of purchase, we are searching for operations that we believe are virtually certain to possess enormous competitive strength ten or twenty years from now. A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek.

I should emphasize that, as citizens, Charlie and I welcome change: Fresh ideas, new products, innovative processes and the like cause our country's standard of living to rise, and that's clearly good. As investors, however, our reaction to a fermenting indsutry is much like our attitude toward space exploration: We applaud the endeavour but prefer to skip the ride.